Hindustan Zinc (NSE:HINDZINC) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Hindustan Zinc Limited (NSE:HINDZINC) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hindustan Zinc

What Is Hindustan Zinc's Debt?

The image below, which you can click on for greater detail, shows that Hindustan Zinc had debt of ₹45.6b at the end of September 2021, a reduction from ₹90.9b over a year. However, its balance sheet shows it holds ₹236.9b in cash, so it actually has ₹191.3b net cash.

How Healthy Is Hindustan Zinc's Balance Sheet?

We can see from the most recent balance sheet that Hindustan Zinc had liabilities of ₹68.1b falling due within a year, and liabilities of ₹32.9b due beyond that. Offsetting these obligations, it had cash of ₹236.9b as well as receivables valued at ₹4.58b due within 12 months. So it can boast ₹140.4b more liquid assets than total liabilities.

This short term liquidity is a sign that Hindustan Zinc could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hindustan Zinc boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Hindustan Zinc grew its EBIT by 75% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hindustan Zinc will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Hindustan Zinc has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Hindustan Zinc recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Hindustan Zinc has ₹191.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 75% year-on-year EBIT growth. So is Hindustan Zinc's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Hindustan Zinc (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.